This Midcap Stock Surged 9% Today, Hits 52-Week High, Brokerage Recommends Buy For 23% Gains

ICICI Direct in its recent report on V-Guard Industries Limited (V-Guard) has placed a "Buy" call on the Stock of the company for potential gains of up to 23% from its current level with an estimated target price of Rs 310/share. V-Guard is a Midcap Consumer Durable sector company that does business in the Electronics and electrics industry. It has a market capitalisation of Rs 11,646.73 crore.
The company has recently signed a definitive agreement on a cash-free and debt-free basis to acquire 100% stake in Sunflame Enterprises (Sunflame) for a consideration of Rs 660 crore. According to the brokerage, Sunflame's acquisition to scale up V-Guard's kitchen portfolio.

Stock Outlook & Returns

The stock of V-Guard last traded at Rs 269.80/share on NSE, surged 2.70% compared to its previous close. The stock recorded its fresh 52-week high level on 14 December 2022 at Rs 270.90, trading only 1.16% down from its 52-week high level. The stock recorded its 52 week low level on 24 February 2022 at Rs 181. The stock in 1 week surged by 8.57%, and in the last 1 month surged by 3.35%, respectively. It has given 11.58% in the last 3 months, whereas, in the past 1 year, it has given 14.81% positive returns. It has given 24.02% positive returns in the past 3 years and 17% positive returns in the past 5 years. 

Acquisition Details

V-Guard has signed a definitive agreement to acquire 100% stake in Sunflame Enterprises (Sunflame) for a consideration of Rs 660 crore, on a cash-free and debt-free basis. In the last 3 years, Sunflame's revenue grew at 15% CAGR (higher than industry growth of ~10-12%) supported by new product launches and geographical expansions. It will finance this acquisition through a mix of debt and internal accruals (V-Guard had net cash of ~Rs 151 crore as on September 2022). With the offer price, Sunflame is valued at 1.9x FY22 sales and 20x FY22 earnings.

"Sunflame" is a leading kitchen appliance company with a strong presence in chimneys, cook tops, cookers and small appliances. The acquisition is in line with VGuard's strategy to strengthen its kitchen appliances portfolios where the company had a very limited presence. Post-acquisition, V-Guard's kitchen appliances revenue contribution to its total revenue will increase to ~10% from 5% in FY22. We introduce FY25E estimates for V-Guard factoring in acquisition and better margin profile of 'Sunflame'. We model consolidated revenue, earning CAGR of 17%, 18%, respectively, in FY22-25E.

Key Conference call highlights

• The Sunflame acquisition will provide significant synergies to V-Guard in areas like geography, product portfolio and channel. Sunflame is a dominant play in the non-south regions (with 80% revenue contribution).
• V-Guard will leverage its established distribution networks in the south region to scale up its kitchen product ranges (post Sunflame acquisition).
• The acquisition will be funded through a mix of debt and internal accruals. The company is likely to raise debt of ~Rs 400 crore. The management is aiming for consolidated RoCE to be >20% over the medium term.

Target Price and Valuation

The brokerage said, "We roll over our valuation on FY25E and revise our rating on V-Guard from HOLD to BUY. We value the company at 35x FY25E earnings with a revised target price of Rs 310/share."

Key triggers for future price performance

• Expansion in non-south regions (revenue contribution increased from 37% in FY18 to 41.7% in FY22) and government housing thrust (to build 1.3 crore new houses under PMAY) will be key growth drivers for V-Guard.
• We believe expansion into high margin product categories (such as kitchen appliances) will lead to EBITDA margin expansion over FY22-25E.
• Plan to increase in-house manufacturing from current 55% to 60%, which will help the company to improve profitability.

Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.